MSCI Vs FTSE: Which is the best index provider?

11 June 2019 |
by Dominique Riedl

An ETF’s results depend on its index. We explain the differences between the two major global index providers and why you shouldn’t mix the two.

Brand awareness counts, and that’s as true for the stock markets of London, New York, Paris and Milan as it is for the fashion houses. When ETF managers partner up their products with an index provider, the evidence is that they choose the big name. Look at the critical developed world category. The MSCI World index utterly dominates the field: with 13 MSCI World ETFs (as of December 2018) lining up against a single FTSE Developed World ETF (not including factor or sector tilts).

MSCI is also the go-to index provider in the emerging markets space: 10 to 1 vs FTSE for vanilla ETFs.

It’s only once you drill down into regions and countries that other index providers such as STOXX, S&P and even FTSE play a significant role. Despite MSCI’s global dominance, there is little obvious difference between their offering and FTSE’s: both offer broadly diversified, market capitalisation-weighted indices. But the devil is in the detail and you can only flush that out with a deep-dive into the two providers’ index methodologies.

MSCI Vs FTSE: the differences

The biggest discrepancy between the two index providers is whether they count certain countries as developed or emerging markets. For example, South Korea is classified as an emerging nation by MSCI but has been promoted to developed market status by FTSE. Therefore South Korea is included in FTSE’s developed market index but not its emerging market one, and vice versa for MSCI. Meanwhile, Poland was upgraded to developed status by FTSE on September 24 2018, whereas MSCI remains unpersuaded - leaving Poland in its emerging market league for now.

Saudi Arabia is a different story. FTSE included Saudi shares in its emerging market index in March 2019, MSCI in June 2019.

The handling of Chinese shares may prove more significant in the long run. Chinese shares are divided into distinct classes that provide different exposures to Chinese firms. Historically, some of these classes were available to foreign investors and some were reserved for Chinese domestic investors - specifically the A-shares.

However, as the Chinese economy opens up, the supply of A-shares available to foreign investment institutions is increasing. This development is likely to lead to a major tilt of emerging market indices toward China, and expose investors to new Chinese investment opportunities.

MSCI has been feeding Chinese A-shares into its emerging markets index since June 2018. Initially, they limited inclusion to 5% of the investable A-share universe by market cap. However, the move has proved popular and MSCI are increasing their A-share market cap successively.

FTSE introduced around 1,200 A-share firms to their emerging market index in June 2019. The 25% inclusion of the investable A-share market cap leads to an amount of 5.5% share of the FTSE Emerging Market Index. Again this number is likely to increase over the forthcoming years as China's capital market regulations improve access and corporate governance.

MSCI vs FTSE: Individual country weights by index

Countries

MSCI World

FTSE Developed

USA

62.67%

60.45%

Japan

8.01%

8.57%

UK

5.68%

5.86%

France

3.86%

3.68%

Canada

3.46%

3.08%

Countries

MSCI EM

FTSE EM

China

31.55%

33.64%

South Korea

12.37%

-

Taiwan

10.83%

12.15%

India

8.97%

11.36%

Brazil

7.65%

9.05%

Source: FTSE, MSCI; as of 28/06/2019

The contrast in index composition is clearer in the emerging markets because South Korea makes a big difference at this level. It’s the second-largest country in the MSCI Emerging Markets Index and so its absence in the FTSE index tends to concentrate its holdings in the other major players.

Small-cap firms cause another material difference between the indices. MSCI global indices capture 85% of the investable universe by market cap and exclude the bottom 15% as small-cap firms. But FTSE global indices track 90% of market capitalisation and exclude the bottom 10% as small-cap firms. Essentially, FTSE scoops up some companies that MSCI define as small-cap, which explains why FTSE indices usually contain more companies.

MSCI vs FTSE: Number of shares by index

Region

MSCI

FTSE

All-World

2,849

3,928

Developed Markets

1,655

2,177

Emerging Markets

1,194

1,751

Europe

443

594

Japan

322

520

Source: FTSE, MSCI; as of 28/06/2019

Although more companies are included in the FTSE indices, their relatively small size tends to limit their impact.

MSCI Vs FTSE: performance

The performance difference has been negligible between the MSCI World and FTSE Developed indices as you can see in this comparison between popular ETFs that track the two.

You can barely slip a sheet of paper between the results of Vanguard’s FTSE Developed World ETF and iShares MSCI World ETF as the differences in index composition aren’t enough to noticeably move the needle.

But the same is not true for the emerging markets. Since launch, the Vanguard FTSE Emerging Markets ETF (+56,75%) has outperformed the iShares ETF MSCI Emerging Markets ETF (+48,75%). Of course, there’s no reason to believe that FTSE’s advantage will hold over the long run. MSCI could overhaul FTSE if future results unfold in favour of its emerging market index composition. For example, if South Korea overperformed relative to other holdings in its index.

MSCI Vs. FTSE – Emerging Markets (30/09/2014 - 13/07/2019)

Quelle: justETF Research; as of 14/07/2019

Small deviations in index construction may make a bigger difference at the regional or country level. This is where paying close attention to different index methodologies can pay off. For example, how much small-cap exposure do you get? What mix of share classes is a China ETF exposed to? Are you tracking a total stock market index which is less likely to saddle your ETF with dealing costs due to constituent company turnover?

What does that mean in concrete terms?

The broader your index, the more likely it is to deliver comparable results to its rivals over the medium and long-term. And you can’t get broader than a global ETF so focus on the cost of the product here rather than the finer details of index construction. For example, the cheapest MSCI World ETF currently sports a Total Expense Ratio (TER) of 0.12%. That’s significantly cheaper than the 0.18% TER of the only FTSE Developed ETF. Similarly, the cheapest MSCI Emerging Markets ETF costs 0.18%, while the FTSE Emerging Markets ETF costs 0.25%.

The situation is reversed among All-World products that combine developed and emerging markets in a single index. The FTSE All-World ETF costs 0.25% versus 0.4% for the cheapest MSCI All-Country World ETF.

However, try to avoid mixing index providers in your portfolio at the broad market level. For example, if you combine an MSCI World ETF with a FTSE Emerging Markets ETF, then you won’t have any exposure to South Korea or Poland. Meanwhile, you’ll hold both those markets twice if you take the FTSE Developed World ETF along with an MSCI Emerging Markets ETF.

Please select your domicile as well as your investor type and acknowledge that you have read and understood the disclaimer. The fund selection will be adapted to your selection.

Germany

Private Investor, Germany

Institutional Investor, Germany

Austria

Private Investor, Austria

Institutional Investor, Austria

Switzerland

Private Investor, Switzerland

Institutional Investor, Switzerland

United Kingdom

Private Investor, United Kingdom

Institutional Investor, United Kingdom

Italy

Private Investor, Italy

Institutional Investor, Italy

France

Private Investor, France

Institutional Investor, France

Spain

Private Investor, Spain

Institutional Investor, Spain

Netherlands

Private Investor, Netherlands

Institutional Investor, Netherlands

Belgium

Private Investor, Belgium

Institutional Investor, Belgium

Luxembourg

Private Investor, Luxembourg

Institutional Investor, Luxembourg

Legal Notice

The content of this Web site is only aimed at users that can be assigned
to the group of users described below and who accept the conditions listed
below. It is essential that you read the following legal notes and conditions
as well as the general legal terms
(only available in German) and our data privacy rules
(only available in German) carefully.

I. Restricting the group of users

1. General

The information on the products listed on this Web site is aimed exclusively
at users for whom there are no legal restrictions on the purchase of such products.

2. Restriction by nationality and due to membership of another legal group

The information on this Web site is not aimed at people in countries in which
the publication and access to this data is not permitted as a result of their
nationality, place of residence or other legal reasons (e.g. for reasons of
supervisory—especially sales—law). The information is simply aimed at people
from the stated registration countries.

Important information for US citizens:

This Web site is not aimed at US citizens. US citizens are prohibited from
accessing the data on this Web site. None of the products listed on this Web
site is available to US citizens. Any services described are not aimed at US citizens.

"US citizens" are:

Citizens of the United States of America (regardless of their place of residence),

Citizens of other countries with their current place of residence in the United States of America,

Future or existing companies and organisations that are organised by statutory
regulations of a federal state, territory or ownership of the United States of America

Assets and trusts that are subject to the law of the United States of America.

Reference is also made to the definition of Regulation S in the U.S. Securities Act of 1933.

Attention:

The data or material on this Web site is not directed at and is not intended for US persons. US persons are:

United States residents

residents of other countries who are temporarily present in the United States

any partnership, corporation, or entity organised or existing under the
laws of the United States of America or of any state, territory, or possession thereof,

any estate or trust which is subject to United States tax regulations

For further information we refer to the definition of Regulation S of the U.S. Securities Act of 1933.

The data or material on this Web site is not an offer to provide, or a solicitation
of any offer to buy or sell products or services in the United States of America.
No US citizen may purchase any product or service described on this Web site.

II. Special information for private individuals

1. Suitability of investing in the fund

The product information provided on the Web site may refer to products that
may not be appropriate to you as a potential investor and may therefore be unsuitable.
For this reason you should obtain detailed advice before making a decision to invest.
Under no circumstances should you make your investment decision on the basis of the
information provided here.

2. Definition of institutional/professional investor and private investor as users

"Institutional investors" are such users of the Web site that would be
classified as professional customers by the German Securities Trading Law
(WpHG). As such, it can be assumed that you have enough experience, knowledge
and specialist expertise with regard to investing in financial instruments
and can appropriately assess the associated risks. Such professional customers
as defined by the German Securities Trading Law (WpHG) are therefore

1. Companies that are

Securities service companies,

Other authorised or supervised financial institutions,

Insurance companies,

Organisations for joint investments and their management companies,

Pension funds and their management companies,

Companies that trade in derivatives,

Stock market traders and goods derivatives traders,

Other institutional investors whose main activity is not recorded by those stated above.

Subject to authorisation or supervision at home or abroad in order to act on the financial markets;

2. Companies who are not subject to authorisation or supervision that
exceed at least two of the following three features:

€20,000,000 balance sheet total

€40,000,000 turnover,

€2,000,000 own funds;

3. National and regional governments and public debt administration offices;

4. Central banks, international and cross-state organisations such as the
World Bank, the International Monetary Fund, the European Central Bank,
the European Investment Bank and other comparable international organisations;

5. Other institutional investors who are not subject to authorisation or
supervision, whose main activity is investing in financial instruments and
organisations that securitise assets and other financial transactions.

Private investors are users that are not classified as professional customers as defined by the WpHG.

III. Information/No offer

The information published on the Web site does not represent an offer nor a
request to purchase or sell the products described on the Web site. No
intention to close a legal transaction is intended. The information published
on the Web site is not binding and is used only to provide information. The
information is provided exclusively for personal use. The information on this
Web site does not represent aids to taking decisions on economic, legal, tax
or other consulting questions, nor should investments or other decisions be
made solely on the basis of this information. Detailed advice should be obtained
before each transaction.

IV. No investment advice or financial analysis

The information published on the Web site also does not represent investment
advice or a recommendation to purchase or sell the products described on the Web site.

V. Risks/Value developments

Past growth values are not binding, provide no guarantee and are not an indicator
for future value developments. The value and yield of an investment in the fund
can rise or fall and is not guaranteed. Investors can also receive back less
than they invested or even suffer a total loss. Exchange rate changes can also
affect an investment. Purchase or investment decisions should only be made on
the basis of the information contained in the relevant sales brochure.

VI. No liability for content

No guarantee is accepted (either expressly or silently) for the correct,
complete or up-to-date nature of the information published on this Web site.
In particular there is no obligation to remove information that is no longer
up-to-date or to mark it expressly as such.

VII. MSCI data

Copyright MSCI 2013. All Rights Reserved. Without prior written permission of MSCI,
this information and any other MSCI intellectual property may only be used for
your internal use, may not be reproduced or redisseminated in any form and may
not be used to create any financial instruments or products or any indices. This
information is provided on an “as is” basis, and the user of this information assumes
the entire risk of any use made of this information. Neither MSCI nor any third party
involved in or related to the computing or compiling of the data makes any express or
implied warranties, representations or guarantees concerning the MSCI index-related data,
and in no event will MSCI or any third party have any liability for any direct, indirect,
special, punitive, consequential or any other damages (including lost profits) relating
to any use of this information. (www.msci.com)

VIII. Links

This Web site may contain links to the Web sites of third parties. We do
not assume liability for the content of these Web sites. justETF GmbH
hereby expressly distances itself from the content and expressly
does not make it their own. It is possible to use “hyperlinks” to link to this
site without the knowledge of justETF GmbH. justETF GmbH has no
control on the setting of such links and does not accept any responsibility
or even liability for the content or depiction on Web sites for which there is a link
to this Web site and expressly does not make the content its own.

IX. Court of jurisdiction and applicable law

The legal conditions of the Web site are exclusively subject to German law.
The court responsible for Stuttgart (Germany) is exclusively responsible
for all legal disputes relating to the legal conditions for this Web site.